Thursday March 5, 07:16 PM
Euro slips on rate cut, economic downgrades
LONDON (AFP) - The euro fell against the dollar Thursday after the European Central Bank slashed its benchmark interest to a record low 1.50 percent and warned of a sharp contraction in eurozone growth this year.
The single European currency in late-day trade was at 1.2558 dollars, down from 1.2657 dollars on Wednesday.
The dollar was at 98.37 yen after 98.98 on Wednesday.
The ECB, as expected, lowered its leading interest rate by half a point to 1.50 percent in yet another bid to reverse a crippling recession in the 16-nation bloc.
Interest rates could go lower still, ECB head Jean-Claude Trichet said.
What particularly unnerved traders was a drastic revision in the bank's macroeconomic forecasts.
It said it expected the eurozone economy to shrink 2.7 percent in 2009, downgrading sharply its previous forecast for a contraction of 0.5 percent.
It foresaw zero growth next year, down from its previous estimate of growth of 1.0 percent.
The ECB also lowered its projection for eurozone inflation to 0.4 percent in 2009 from its December forecast of 1.4 percent. For next year, prices are set to rise 1.0 percent, a downward revision from 1.8 percent.
The Bank (TBHS - news) of England earlier in the day cut is main rate by half a point to 0.50 percent, the lowest level in its 315-year history and said it would pump 75 billion pounds of newly-created money into the system to combat a credit crunch.
In an extraordinary bid to free Britain from its first recession in 18 years, the BoE said it would issue the equivalent of 106 billion dollars or 84 billion euros via so-called "quantitative easing" measures.
The Bank of England plans to buy government bonds from commercial banks in the hope that the institutions will begin lending again to businesses and individuals after sitting tight since the credit crisis erupted in 2007.
"Quantitative easing is the last-chance saloon for the Bank of England," GFT market strategist David Morrison told AFP.
BoE Governor Mervyn King admitted he was uncertain how long the unconventional monetary policy would take to stimulate the British economy.
"These measures, we think, will work in the long run. I can't be sure how long it will take," King told Sky News television.
The BoE actions had a limited impact on the pound, which slipped to 89.92 pence to the euro from 89.16, and to 1.4136 dollars from 1.4195 on Wednesday.
The euro was changing hands at 1.2558 dollars against 1.2657 dollars late on Wednesday, at 123.48 yen (125.29), 0.8992 pounds (0.8916) and 1.4737 Swiss francs (1.4195).
The dollar stood at 98.37 yen (98.98) and 1.1734 Swiss francs (1.1683).
The pound was at 1.4136 dollars (1.4195).
On the London Bullion Market, the price of gold rose to 913 dollars an ounce at the fixing from 908.50 dollars an ounce on Wednesday.
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